The UK’s pension-savings system is broken and long overdue for sweeping change.
Over the past 20 years, this country has seen the abandonment of investment in the domestic economy by United Kingdom pension funds, with the almost total liquidation of their holdings in listed UK equities built up over generations. This has depressed UK companies’ valuations, constrained business investment and limited the supply of growth capital to improve productivity and fund innovation.
So begins the Tony Blair Institute’s report Investing in the future, boosting savings and prosperity for the UK
It is extraordinary how this report , published May 26th is repeating the remarks of Jeremy Clarke and Andrew Griffiths of the Treasury, the shadow chancellor, Rachel Reeves, the Mayor of the City of London and the CEOs of L&G, Phoenix and Schroders and the CEO of the Pensions Regulator.
All are calling for fewer pension schemes investing for growth, in the UK and in a radically different way to what is happening today.
The only dissenting voice comes from those incumbent in the current pension-savings system. The PLSA did not recognise the TBI’s characterisation of the pension system telling the FT the paper had “some extremely radical but also extremely impractical” ways to encourage pension funds and life insurers to invest in the UK.
“There are much simpler and quicker solutions,”
said Nigel Peaple, director of policy and advocacy with the PLSA.
“The government and pensions industry are already working intensively together on these issues and, provided they always put the interests of savers first, they should result in better outcomes for everyone.”
The proposals
Like Nicholas Lyons, TBI’s proposal involve the creation of multi-billion pound superfunds that would pool the investments of DB and DC plans, using at first the PPF and then a number of replica superfunds so that the entire pension system (including currently unfunded pensions) would be funded in the same way
The initial fund would grow to £400bn and would sit within the PPF which would grow as a consolidator, along the lines currently under consideration by the Treasury. DB funds could volunteer to participate in the PPF and the PPF would offer members equivalent benefits
Those DB funds that remained open would be encouraged to invest for growth (rather than buy-out with an insurer) . The PPF model would then be replicated and rolled out throughout the UK in a series of regional, return-generating, not-for-profit entities that would progressively absorb the UK’s 27,000 defined-contribution funds, the Local Government Pension Schemes, the remaining DB funds and, potentially, public-sector pension schemes, which in most cases are not funded.
Extremely radical and extremely impractical?
The current pension system supports a huge number of people whose livelihood depends on schemes remaining unconsolidated and independent of each other. Not only would these proposals collapse the purpose of the PLSA but they’d render redundant most pension consultants, lawyers, actuaries, administrators, covenant advisers et al. Rather than a thousand flowers blooming , there would be up to ten sovereign wealth funds managing liabilities and savings on a scale that would only be rivalled by the largest US funds (Calpers et al).
You can think of a thousand reasons not to adopt such proposals, but if they set the boundaries of the possible, then the more modest proposals of the DWP, TPR and the Treasury seem more realistic.
Tony Blair employed Frank Field to think the unthinkable in his first administration. I wonder what Frank feels about these proposals, if he is still well enough to read them.
I suspect that had Frank put these forward before the calamity outlined in TBI’s excellent report, we might have very different capital markets in the UK , to the much diminished markets we have today.
But equally, we should remember that the seeds for the demise of DB plans, what Field described as Britain’s great economic miracle, were sewn in the years when Blair’s power was at its height. The report sees the problem as originating in the accounting reforms that came in 2004 and that the capitulation of DB schemes to “de-risking “followed.
The report does not mince its words – on the management of LDI it has this to say
That consultants could design and trustees could approve an investment strategy that was intended to generate a fall in the value of a pension fund’s assets is beyond comprehension.
Only in the context of a marked to market approach to liability valuations and the tyranny of the discount rate, can LDI become comprehensible.
The motivation for maintaining the status quo is clearly laid out
The current system has therefore in effect served no one’s interest except the pension consultants, who assisted funds and their sponsors to adapt to the changed rules, and the life-insurance companies, who are now benefiting from relieving UK companies of the accounting-driven burden, though they did not design the system.
The impact of this report will be to strengthen the resolve of the Treasury to drive through change, through DWP and TPR. It will weaken the lobbying platform of the PLSA and the consultants and it will cause trustees and employers to think carefully before expediting their plans for buy-out.
The solution proposed is beyond the power of any Government to push through, it would require the equivalent of a financial revolution where the oligarchs were deposed through a coup. This is more likely to happen under a Labour than Conservative Government, but considering the alignment of all sides of Government behind some version of these proposals, the PLSA and the funds industry , should be taking this report more seriously.